Tuesday, November 24, 2009

My sense is that optimism is in the air for the floor covering industry. Many of my friends and colleagues are hopeful. You’ve read the good news too. The recession is over. More people are preferring carpet. Home sales are up. Life is good!

Not so fast. The numbers don’t support the positive vibes. Perhaps you read that there are fewer houses in inventory to be sold and that home sales are up. But the worst has yet to come; there are still more than three times the current number of foreclosures still in pre-foreclosure. Furthermore, industry pundits tell us that 2010 and 2011 will see great numbers of foreclosures too. The impact on the housing market is immense. The flooring industry is unlikely to emerge from the protracted recession without an improved housing sector.

Then there is retail replacement and pent-up demand. Maybe, but maybe not. Watch the Consumer Confidence Index which continues to bump-along the bottom. Furthermore, the longer a customer keeps her carpet the more likely she is to be offended by it, and will choose a hard surface when she replaces it. Considering the slowdown, there are millions of customers with carpet that has outlived its useful life. And every day, they swear at it and tell themselves, “I can’t wait until I can replace this gross carpet with….” To all those naysayers, the customer does not believe it’s her fault that her carpet has worn out.

Then there’s that pesky research issue. Ed Kelly, president of American Express Publishing, recently distributed a letter quoting Harrison Group’s research on the affluent in which he says that holiday sales will be off 15% from last year’s very poor numbers. American Affluence Research Center recently published similarly almost as negative news. Clearly, the affluent consumer is still sitting on the sidelines in comparison to 2007.

New construction and housing (and all that manifests due to it) have an immense impact on the flooring industry. And possibly worse, affluent consumers who are responsible for 50% of the total retail dollars spent in America aren’t interested. My suggestion to those in the industry; enjoy your current customer and euphoria, but don’t advertise for new employees just yet.

Business is now evolving more slowly. The downward spiral may have ceased. However, that doesn’t mean we will see a spike in the near future. The new normal is not kind to businesses; particularly those connected to the home. You have to adapt in order to survive. Neither blind optimism nor capitulation is a good choice. As an expert in retail and service businesses I often consult with companies trying to survive the present even as they prepare for the future. While the recommendations I provide my clients may vary, one thing remains the same – they all benefit from a thorough examination of their business and input of new information and perspectives.

The floor covering industry will survive and the tempestuous times won’t last forever. But first, you need a plan to get through this mess. The good news: 2014 looks solid.

Friday, November 20, 2009

According to news reports the U.S. government has executed its first warrant and seizure of property for illegally logged wood under the timber provisions of the U.S. Lacey Act Amendments. The story broke with this article, Gibson Guitar plant in Nashville raided by feds.

Federal agents served a subpoena on Gibson Guitars on the 18th and according to subsequent reports, they seized guitars, computers, files and wood. Apparently an investigation into trafficking in illegally harvested rosewood and ebony from Madagascar’s rain forests lead to Gibson who uses the wood to embellish their guitars.

Gibson’s CEO issued a press release saying that the company takes the issue of responsible wood sourcing very seriously and makes every effort to ensure that all of its wood comes from certified sources. He sits on the board of the Rain forest Alliance, an NGO that certifies products for their environmental credentials, but has now stepped down pending conclusion of the investigation.

This is the first such action under the new timber provisions of the Lacey Act that we have heard of and it should be a wake-up call for anyone in the timber products industry who may not take this seriously. Whether the company intentionally did anything wrong remains to be seen. But we can assume that business is has been disrupted and the publicity won't be helpful. Let’s hope that they have fully documented their “standard of due care”and can demonstrate the steps they took to comply with the Lacey Act. They could have unknowingly received illegally harvested wood, even if it was certified. If they are absolved of all wrong doing any illegal wood and products that contain it will still be seized.

This brings new urgency to all users of imported wood products – flooring covering, furniture, and a hundred other industries. It’s important that you make sure your company has procedures in place to avoid this kind of thing, or in the very least, that you can show that you took all reasonable steps one could expect of you to avoid illegal wood.

Thursday, November 19, 2009

Consensus is that the residential floor covering hurricane has passed and a slow recovery has started. Meanwhile, a tropical storm in the commercial real estate market is quickly brewing off shore and there is reason to believe it will grow into a storm larger than anyone expected. The floor covering industry needs to take note.

Last week I attended the Star Net Worldwide Fall Meeting where several excellent speakers reviewed the past and looked into the future. It was a mix of good, bad and ugly news and since then I've taken a closer look at what is going on in the commercial real estate market which is why I'm writing to you today.

But first, the good news....the newly released McGraw Hill 2010 Construction Outlook says that overall construction should increase 11% in 2010; a welcome change. They say the residential construction market is on its way back:

Single family constructions has already bottomed out. A projected 30% increase in units in 2010 will take us back roughly to the 2008 level. In 2009 new units fell below 600,000; the expected 780,000 units is still well below a sustainable building rate of 1.2 million units per year, but it's moving in the right direction.

The multi-family sectortook a huge hit in 2009, down 55% in units. It is expected to slowly turn up next year with a 14% increase.

Unfortunately, that is where the good news ends. Here is where the picture can turn bad or even ugly, depending upon what happens with commercial lending and commercial default rates.

Outlook for the Commercial Real Estate MarketIn 2009 commercial construction was down 43%. If everything stays on course we could see a 4-5% increase in 2010, according to McGraw Hill, although no substantial recovery is expected until 2011. Health care, military and federal buildings will be the bright spots largely due to the stimulus package. Retail and hospitality construction will continue to decline.

Currently there are $83 billion in commercial property defaults and that number is expected to double by the end of this year. So far, banks have only foreclosed on about 10% of these loans and are moving slowly to recognize further losses on their books. Commercial property prices have fallen 30-50% from their peak in 2005, wiping out the equity that owners had to finance in the first place.

Between $1.0 and $1.4 trillion in commercial property loans will need to be refinanced over the next few years and more than half of that is expected to be "under water." Zisler Capital Partners, who focus on real estate investments, estimate that building owners will default on more than half of these loans since much of the property will be worth about half of its originating value. If this happens, some banks could end up insolvent as they reduce their holdings.

The Federal Reserve Bank is apparently concerned as evidenced by their recent extension of the TALF (Term Asset-backed Loan Facility) program to the middle of 2010. TALF is designed to increase lending through asset-backed securities. Because of the tight restrictions on this program however, it may not benefit small developers or local commercial property owners with heavy debt loads - the primary customers for most commercial floor covering businesses.

Not trying to scare anyone but it may be time to pull out the commercial grade rain gear and prepare, just in case, for Round Two of a very stormy season.

I am very interested know what others are thinking about this, especially leaders in our industry such as Mohawk, Shaw, Armstrong and Interface, and anyone who is watching this development.

Tuesday, November 17, 2009

Flooring Retailers: Take Note! Are You Evolving Your Digital Retail Experience To Take Into Account Gen Y Women Consumers' Greater Use of the Internet?

It's a question that comes out of Stuart Hirschhorn's post about Flooring Trends Target Generation Y and his statement that the generation born between 1974 and 1993 [aged approx. 35 to 16 in 2009] and known as "Generation Y will cause changes on where and how floor coverings are sold."

More specifically, "Generation Y looks to the Internet to retrieve product information, get opinions from social networks, and use electronic connections to communicate .. and make purchases."

And, I would hate for you to dismiss it by thinking that Gen Y isn't your customer, or that what you're doing now works just fine. As important as demographics are, here are two reasons for not relying solely on age when you consider your customers:

1. Our core consumer, who makes or influences over 80% of the purchase decisions for the home [and that includes flooring], is a woman. Women tend to follow lifestage behavior patterns more closely than they do demographic patterns. Plenty of Boomer and Gen X women behave Gen Y-like as a result of where they are in life and their technology adoption level.

2. Age cohorts or generations do not exist in a vacuum. What one group does influences the others. Boomers are probably the best example of this; they reinvented the meaning of every lifestage they have gone through so far...

That means that the relevant flooring customer group is larger than Gen Y.

So, if you meet or exceed the requirements, demands or needs of your most demanding customer group - in this case Gen Y and women - you will also benefit your other customers who may not have articulated the same needs, but have them nonetheless. As it relates to women customers, this is something that American Express discovered while researching business travelers.

Across the board, customers start the shopping process online at a search window. The numbers vary -- from 93% who research product online according to Accenture and 68% who search for information online before visiting a store according to Deloitte [see Ignite Your Consumer-Dealer Sales... where I reference these stats]. If they aren't doing so themselves, they do what my 82 mother does: ask me or my sister to do the search for her.

The truth is that customers are finding out about you elsewhere that via your brick-and-mortar store.

They need to evolve to take into account that consumers in general and women consumers in particular are time starved, do not want to be taken advantage of, and want to be educated consumers.

Are you surprised then that consumers are turning to the Internet for product information, to social networks for opinions, perspectives and advice, or to electronic tools to communicate more efficiently?

And, it's not just Gen Y who relies on Amazon-like product reviews or Twitter exchanges or Facebook advice.

So, are you evolving your digital retail experience? And, how are you doing so?

Thursday, November 12, 2009

Declining domestic sales and a weak dollar have some flooring manufacturers considering exporting as a way to take advantage of the global market place. I whole heartedly support this concept but it’s not as simple as shipping a great widget to a new widget market. Although flooring may be global, significant differences in language, consumer preferences, channels, manufacturing standards – just to name a few considerations to avoid costly and time consuming mistakes - make flooring markets very local.

Vive la différence! – Just make sure you understand what la différence is!

Consider the case of a U.S. hardwood flooring manufacturer who decides to pursue new business in Europe:

Language. Whilst the U.S. is a huge geographic area pretty much all of the customers speak the same language. On the European Continent there are around 50 different countries each with its own language or dialect, culture, food, market conditions and preferences in color, design and wood species. The U.S. wood manufacturer will need to find a local partner or hire local employees or agencies to produce appropriate marketing collateral and prepare installation instructions for each carton printed in more than 30 languages.

Consumer preferences. In the U.S. wood flooring is either solid or engineered dictated mainly by the construction of the houses (slab or basement.) Throughout Europe the product of choice is almost entirely engineered longstrip - 3 layers approximately 8 ft long, 5-7” wide, 9/16” thick and installed using the floating method. The only U.S. manufacturers who offer this product are Mohawk (as a result of its acquisition of Columbia Flooring’s Malaysian operation) and Award who produces only small volume for the U.S. domestic market).

Random length is not a concept that European customers understand. They expect every piece in the carton to be the same length. Given the configuration of most U.S. flooring plants this would create a lot of waste and add to the manufacturing cost therefore offsetting some of the exchange rate advantages.

Installation style also differs. In Europe, end joints are in line in every alternate row of flooring laid….a practice frowned upon by U.S. installers and consumers.

Species and face preferences. Whilst Red Oak still accounts for well over half of all domestically manufactured products in the U.S., it is virtually unseen in the European market as consumers do not like the variations in color. They prefer European White Oak which gives a cleaner more uniform face. In the U.S. the majority of face veneers are still rotary peeled which gives a somewhat wilder “plywood” grain appearance. Whilst this is very well accepted in the U.S. marketplace, it is disliked in Europe where consumers prefer the sliced veneers that replicate the look of solid flooring. Ash is preferred to maple, and so on. Exotic species are growing in popularity but environmental concerns and raw material supplies mean these products are largely the domain of Chinese manufacturers today who need to show environmental compliance.

Finish preference. Over 95% of products are finished as natural in Europe; stained products are virtually nonexistent.

First rate quality is a must in the European market and all products are expected to carry the CE mark confirming that the manufacturers and their products conform with mandatory consumer safety, health and environmental requirements.

Taking products to the consumer. Assuming the wood manufacturer is able to produce a product that satisfies new, local markets, the next step is to find a channel to get the product to the consumer. Channels are also different in Europe. There, manufacturers have sophisticated logistics systems and centralized warehouses and deliver directly to and service retailers making the function of traditional distributors largely redundant.

So there we have it and hopefully I have highlighted some types of issues U.S. manufacturers need to consider before “diving” into the global marketplace. My intention is not to scare anyone away, far from it; I believe strongly in global opportunities and I am a champion for those companies pursuing it.

Vive la différence! – Just make sure you understand what la différence is! Look to becoming involved globally but remember the global market is made up of a number of local markets and it is important to know and understand these differences. Identify your target markets and thoroughly research them. The Floor Covering Institute has consultants who can help you and if you want an overview of the European market at close quarters my colleague Jim Gould (jgould@floorcoveringinstitute.com) leads a U.S. delegation in January each year to the Domotex Fair in Germany (DOMOTEX HANNOVER) which gives an insight into all flooring products offered in the European market.

Like it or not we are all part of a global market and no matter how we become involved we need to get involved to survive. Acquisitions, mergers, strategic alliances, private labels, and exporting - all offer opportunities.

I would love to hear your ideas or questions and as always if you have…… thanks for reading this.

Tuesday, November 10, 2009

The following is based upon Catalina Research's statistical trends and outlook for floor covering which indicate that Generation Y is floor covering's next target.

If your business is to survive the current recession and thrive during the next economic recovery, it's time to set your sites on the Generation Y - those born between 1974 and 1993. Catalina's research shows that as we entered the recession in 2007, it was the younger demographic that was increasing its floor covering spending while their Baby Boomer parents were cutting back on floor covering purchases.

These trends reflect what is considered the lifecycle of purchases. The Baby Boomers (ages 45 to 64 years), numbering 38.0 million strong in 2008, have cut their floor covering spending as their concern about saving for retirement increases or they retire. On the other hand, the 42.7 million members of Generation Y are focusing on forming households, starting families, and purchasing homes and home furnishings. It is Generation Y that is taking advantage of the first time home tax credit and putting a floor under the prices of homes in the lower end of the housing market.

Despite their greater numbers, Generation Y represented only 16.9% of total U.S. household floor covering spending, while Baby Boomers accounted for 40.1%. However, the Boomer’s share is declining, while Generation Y’s share is on the rise. This trend will accelerate over the next decade as the leading edge of Generation Y enters their peak floor covering purchasing years (35 to 44 years) and Boomers begin to enter a period of their lifestyle when household floor covering purchases decline sharply.

The changing of the generations could also contribute to a continuing shift to hard surface flooring. In 2007, Generation Y was more likely to purchase hard surface flooring and area rugs, while Baby Boomers and older generations are more likely to purchase wall-to-wall carpet. This trend indicates that the flooring market could increase its dependence on wood and laminate flooring, vinyl sheet and floor tile, and ceramic tile over the next decade. Currently however, Generation Y may prefer the lower-end lines of these markets, since their incomes are probably lower than their older cohorts.

Generation Y will impact where and how floor covering is sold. This is the first generation to be highly dependent on the Internet as a medium, just as their Baby Boomer parents were the first to experience the impact of television. Generation Y looks to the Internet to retrieve product information, get opinions from social networks, and use electronic connections to communicate with suppliers and make purchases. Manufacturers, distributors, retailers, and installers must utilize the online medium to reach Generation Y as they increase their share of household floor covering purchases. The successful players in the floor covering market will be able to take advantage of these trends and meet the needs of the growing Generation Y, the younger demographic.

If you have a question or observation about Generation Y shoppers buying floor covering please comment here. I'd love to discuss it!

Friday, November 6, 2009

The Faus Group patent for its Embossed in Register R and Joint Guard R technologies was invalidated this week by the European Patent Office.

Less than two years ago Faus Group announced the issuance of European Patent No. 1 229 183 B1. This patent was issued to the innovative Spanish laminate manufacturer for its Embossed in Register R and Joint Guard Rtechnologies. Since then some manufacturers signed licenses with Faus to access this intellectual property while others claimed the patents were without warrant.

This week the European Patent Office invalidated its own patent, claiming that prior art from Pergo and Japan existed. Since Faus’s petition did not show any new technology, the patent was revoked. For an industry that has fought laminate patents almost as long as the product has been available, no one wanted another IP battle.

What impact will this change have on Faus and the laminate industry? It is assumed that this will be one less lawsuit for the industry to worry over. This move removes the potential of any liability of competitors Kronotex, Tarkett and Balterio. Unilin, a division of Mohawk Industries, and Berry had cross licenses with Faus based on their technology; however, this decision calls into question whether or not these companies can or will withdraw Faus’s access to their patented click joint.

It’s hard enough to keep up with all of the players but when the rules of the game are changed every couple of years, it makes it that much more difficult. Stay tuned and the Floor Covering Institute will try to keep you informed and up to date.

Wednesday, November 4, 2009

My unofficial straw poll taken by questioning a variety of flooring dealers from all over the country who call us with questions on problems or issues daily has given us a glimpse of good news. There is an up-tick in flooring business of late and business is stabilizing.

What this means is that the backwards slide seems to have subsided and customers are walking in the door and buying. The story is the same from Connecticut, to Dalton Georgia, to California. Unless you’re in a market that has been affected by serious downturns like Elkhart, Indiana or Detroit, Michigan flooring dealers are starting to breathe just a tad easier.

They tell me builder business is still off, no surprise there, and that homes being purchased from foreclosure and remodeling projects are where the business is coming from.

What’s selling? The two leading products are carpet and laminate and not necessarily the cheapest stuff. The mix is roughly 60% carpet and 40% hard surface. Carpet because there’s a lot of value in it. It can be easily installed, quickly and make an instant impact on a space. It’s warm and comfortable. One California dealer said he’s got customers coming in that say, “just give something to cover the floor.” Another retail dealer said that her customers are buying carpet because they are spending more time at home and carpet is more inviting to spend that time on, lying around the floor doing things with family. I found this interesting and it’s a perspective the industry may not have realized. This could actually be a theme from the old advertising slogan the carpet industry used years ago, “Carpet. It Just Feels Better.” There are tractor trailers running around Dalton that still have this signage on them. For sure a marketing idea that could sell carpet as being warm, comfortable, inviting and luxurious – a floor "the whole family can gather on.” This would certainly appeal to the primary buyer of carpet; women.

Laminate is the other flooring mentioned as the hard surface leader. There are so many different kinds with looks that mimic wood, vinyl, stone and tile that it’s hard to tell if it is or isn’t.

The other hot product is luxury vinyl tile. It used to be relegated to basements. Now it's being marketed for use all around the house. It's popularity is the most surprising of all and the information is coming from dealers in all parts of the country. This may be the hottest product on the market today.

Just as the banking industry is flush with cash because they’re not lending it, consumers who are gainfully employed home owners may be in the same situation. Everyone’s been paranoid to spend money, they’re paying off debt and their homes aren’t getting any prettier. There comes a point when you spend so much time at home and see things you want to change that you just have to. These projects may be done a room at a time and new floor covering can make the biggest difference.

One fact you have to remember - every structure in the world has to have floor covering. This won't change. Why do you think Warren Buffet bought Shaw? Look at his investments; they are in businesses that provide the three basic necessities of life or touch on them: food, clothing and shelter, and flooring is the foundation of the sheltered space. The economy may take time to recover but a sure bet is that the pent up demand for floor covering will be there. There may well be fewer dealers selling it but there should be a lot of customers to buy it.

What's notable about this is that all of these opinions came from my associates at the Floor Covering Institute. Obviously, there is a diversity of opinion among my own colleagues.

By the same token, I believe that they represent the diversity of opinions in our industry on many issues. For example:

(1) Are distributors growing stronger as they pave a new path or are they dinosaurs?

(2) Is green a fad or a major trend that will change our industry forever?

(3) Will more governmnet regulation protect our industry from unfair practices or will it merely bury us in paperwork?

We began this blog several months ago, not to pontificate to the industry, but to open an unbiased forum in which YOU could participate - for you to bring up issues you felt were important.

After publishing a recent report on the Lacey Act Amendments of 2008, I received a note from a top industry executive saying, "It's about time our industry had an independent voice rather than sources that are pitching their own agenda." That statement meant a great deal to me because one of my goals in forming the institute was to create an independent entity with a broad base of knowledge and expertise coming from executives that have performed as leaders in our industry. While our consultants are members of the institute, they are individuals with their own ideas, opinions and companies.

As advisors to the industry, we have no agenda except to see the floor covering industry succeed and thrive and we will continue to speak independently.

Please take a minute and let us know what is on your mind. Post a comment here or send me an email. You'll probably receive responses from more than one of our associates and don't be surprised if they approach the issue from different angles, perhaps even reaching different conclusions. Hopefully a healthy discussion will ensue.

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The Floor Covering Institute Blog brings you insights, perspectives, best practices and resources relevant to the global flooring industry all from seasoned and recognized flooring industry experts who have owned, operated, and served flooring businesses in every tier from manufacturing to retail buying groups. Will you join us as we discuss ways to improve this marvelous industry?